Article Internationalisation of Russia's Gazprom

econstor www.econstor.eu Der Open-Access-Publikationsserver der ZBW Leibniz-Informationszentrum Wirtschaft The Open Access Publication Server of the ZBW Leibniz Information Centre for Economics Heinrich, Andreas Article Internationalisation of Russia's Gazprom Journal for East European Management Studies Provided in Cooperation with: Rainer Hampp Verlag Suggested Citation: Heinrich, Andreas (2003) : Internationalisation of Russia's Gazprom, Journal for East European Management Studies, ISSN 0949-6181, Hampp, Mering, Vol. 8, Iss. 1, pp. 46-66 This Version is available at: http://hdl.handle.net/10419/90422 Nutzungsbedingungen: Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich auf die Dauer des Schutzrechts beschränkte einfache Recht ein, das ausgewählte Werk im Rahmen der unter http://www.econstor.eu/dspace/nutzungsbedingungen nachzulesenden vollständigen Nutzungsbedingungen zu vervielfältigen, mit denen die Nutzerin/der Nutzer sich durch die erste Nutzung einverstanden erklärt. Terms of use: The ZBW grants you, the user, the non-exclusive right to use the selected work free of charge, territorially unrestricted and within the time limit of the term of the property rights according to the terms specified at http://www.econstor.eu/dspace/nutzungsbedingungen By the first use of the selected work the user agrees and declares to comply with these terms of use. zbw Leibniz-Informationszentrum Wirtschaft Leibniz Information Centre for Economics

Internationalisation of Russia s Gazprom Internationalisation of Russia s Gazprom * Andreas Heinrich ** This article explores the specific features of the institutional environment and their implications for business operations of Russian companies on foreign markets. The author gives some insights into the relationships between internationalisation and firm behaviour. In order to analyse how and how far internationalisation can influence enterprise behaviour, this article deals with the business activities of the Russian gas monopoly Gazprom on foreign markets. It hypothesises that the different institutional settings on the various markets influence the enterprise behaviour of Gazprom, i.e. that internationalisation disseminates international norms and practices. Der Artikel beleuchtet die spezifischen Merkmale der institutionellen Umgebung und ihre Verwicklungen für Geschäftshandlungen von russischen Unternehmen auf ausländischen Märkten. Der Autor gibt Einblick in die Beziehungen zwischen Internationalisierung und Firmenverhalten. Zwecks der Analyse, wie und inwieweit Internationalisierung das Unternehmensverhalten beeinflusst, behandelt der Artikel die Geschäftstätigkeiten des russischen Gasmonopolisten Gazprom in ausländischen Märkten. Er stellt die Hypothese auf, dass die unterschiedlichen institutionalen Bedingungen auf den unterschiedlichen Märkten das Unternehmensverhalten von Gazprom beeinflussen, d.h., dass Internationalisierung die Verbreitung von internationalen Normen und Praktiken zur Folge hat. Key words: Russia / Gazprom / institutional environment / export / strategic partnerships / internationalisation process * manuscript received: march-april 200, revised: june 2002, accepted: september 2002; ** Andreas Heinrich, born 970, Ph.D Candidate at the Institute for East European Studies, Free University of Berlin. Major areas of interest: Internationalisation, Corporate Governance, Energy Sector of the Former Soviet Union. Corresponding address: Andreas.heinrich@cityweb.de 46

Andreas Heinrich 1. Soviet / Russian Gas Exports 1.1. The Institutional Environment of Economic Activities This study deals with the Soviet/Russian gas industry, i.e. the Soviet Gas Ministry and Gazprom respectively. This article will concentrate on natural gas exports, because for a firm of the extracting industry exports are the main element of internationalisation. Other aspects of internationalisation such as FDI, strategic partnerships and international finance will be considered to a lesser extent. In socialist times the markets for Russian gas exports could generally be divided into countries with centrally planned economies, i.e. the Council of Mutual Economic Assistance (CMEA) trading area, and the world market, which in this context means first of all Western Europe due to technical restrictions, i.e. the lack of export infrastructure for gas deliveries to other markets. In post-socialist times, Central European countries have largely adapted to the formal and informal rules of West European market economies. At least as far as Russian gas exports are concerned Western and Central European countries can be grouped together, now forming part of the world market. In the former Soviet Union (FSU) countries, however, internationalisation has so far influenced first of all the formal institutions. Informal institutions differ strongly from Western standards. Accordingly post-socialist foreign markets for Russian natural gas exports can be grouped into West and Central European market economies on the one hand and FSU economies on the other hand. In some Central European countries Gazprom s business behaviour differs not always from that in the FSU. In countries like Bulgaria or Hungary the company has repeatedly tried to reach its aims with similar methods and instruments as employed in the FSU. However, when these methods of enforcement of interests failed, Gazprom changed to business behaviour, which follows international standards and conventions 2. On the firm level the transition to a market orientated enterprise after the breakdown of the socialist systems needs a pro-active approach to acquiring complementary resources, through both investment in complementary assets and organisational learning (Meyer, 2000). Especially in the area of marketing, firms have to improve their basic competencies in terms of structure, systems and processes, organisational culture and human resources (Batra, 997; Martin, 999). To sum up, both phenomena - internationalisation and institutional transition - force incremental learning from enterprises. One possibility to learn is using In this article the term CMEA refers only its East European member countries, i.e. Bulgaria, Czechoslovakia, German Democratic Republic, Hungary, Poland, and Romania. 2 A good example is the dispute over Topenergo in Bulgaria (Heinrich, 999a; Ganev, 200 ). 47

Internationalisation of Russia s Gazprom strategic alliances to access or internalise new technologies and know-how beyond firm boundaries. The mutual dependence in the relationship between supplier and customer leaves few or no alternative counterparts to choose from. This dependence causes the firms to develop joint activities and a shared responsibility for developing their commercial activities. The more the firms depend on each other, the more they will engage in the relationship and uncover opportunities to develop the foreign market (Blankenburg-Holm & Erikson, 2000). To the supplier such alliance means greater access to market knowledge, making the customer relationship useful for developing the foreign market. The relationship can be used as a bridgehead for a further penetration of the foreign market. Blankenburg-Holm and Erikson (2000) show that suppliers bridgehead relationships are conditioned by the personal relations with the foreign customer which generate experimental knowledge. Experimental knowledge refers to knowledge of culture, customs, business and market structure of individual markets (Clark et al., 997; Chetty & Erikson, 998). Experiential knowledge is developed from within the mutual relationship and not from within the firm. It is generated within this relationship and then stored in the procedures and routines of the firm. 1.2. Soviet Period Economic internationalisation as defined in this analysis did not have a real direct impact on the Soviet Union because control of productive assets was highly concentrated in the political elite and socialist institutions mediated and buffered international transactions and price signals (Evangelista, 996; Stent, 984). That is why the Soviet period will be considered to a lesser extent. Soviet gas exports to member countries of the CMEA started with deliveries to Poland after World War II. Exports to Czechoslovakia began in 967. But deliveries to Eastern Europe remained low throughout the 960s as increments in consumption were largely based on increased domestic production. In the second half of the 960s, the Soviet Union became interested in developing a widespread pipeline network for natural gas. But only the oil price shock of 973-74 brought about a reversal of the CMEA countries previously reluctant attitude towards energy integration. Soviet gas exports to Eastern Europe were expanded gradually in the 970s. Deliveries to the German Democratic Republic started in 973, to Bulgaria in 974, to Hungary in 976, to Yugoslavia in 979 and to Romania in 980 3. 3 Exports to Yugoslavia did not reach the contracted level of around 3 billion cubic meters (bcm) per year until 983 because of delays in the construction of distribution systems and in conversions of end-users appliance (Estrada et al., 988; Hardt, 984). 48

Andreas Heinrich Natural gas exports to Western Europe were a direct consequence of the expansion of the pipeline network for deliveries to Eastern Europe. In 968, the first deliveries to Austria were made. Soviet gas exports to Western Europe accelerated at the beginning of the 970s with deliveries to the Federal Republic of Germany beginning in 973 and to Italy and Finland in 974. In the late 970s, gas exports to Western Europe expanded threefold and extensions to the European gas grid enabled the Soviet Union to extend supplies to France in 976 (Estrada et al., 988; Stern, 989). 1.3. Post-Soviet Period In 989, the Soviet Ministries of the Oil Industry, the Gas Industry and Petroleum Refining were re-organised and amalgamated to create a single Ministry of the Oil and Gas Industry. Plans were developed to establish one state company for the oil industry, Lukoil, and another one for the gas industry - Gazprom. The plan for the gas industry was realised within a few weeks, and nearly the whole staff of the ministry changed into the management of the new company, which meant personnel continuity from Soviet times. Gazprom became responsible for all enterprises directly involved in production, refining, transportation and storage of natural gas. Thus, Gazprom holds the monopoly on production, transport and export of natural gas (Kryukov & Moe, 996; Kryukov, 998). Exports are controlled through Gazprom s export division Gazeksport - formerly Soyuzgazeksport - and various joint venture marketing companies in all the countries to which Russian natural gas is exported (Stern, 993). The main activities of Gazprom outside Russia include the expansion of export capacities and at the same time access to international financial markets in order to obtain the necessary finance, the conclusion of strategic partnerships with foreign companies, the struggle for control over transit pipelines in Eastern Europe, and rivalry with Central Asian gas producers..3.. The Former Soviet Union The importance of the FSU as export market for Russian gas is decreasing due to the widespread use of barter and a serious non-payment crisis in most of the countries. Gazprom endeavours to find other suppliers for these countries. The most important of the companies is the US-based Itera group which has strong informal connections to the Russian gas monopoly and supplies Russian and Central Asian natural gas to customers in the FSU. Itera used sometimes tough and ingenious methods to monetise its gas deliveries. In 2000, the company was the largest intra-fsu gas trader with deliveries of 45. bcm compared to Gazprom s deliveries of 43.4 bcm. Itera is the single supplier for Georgia and Armenia. In 2000, it was responsible for around 25% of the natural gas deliveries to the Baltic States, for 54% of the deliveries to Ukraine, for 25% of 49

Internationalisation of Russia s Gazprom the gas deliveries to Moldova and for 35% of the supplies to Belarus. In addition, Itera is the operator of the gas pipeline grid in Armenia and Kazakhstan (Liuhto, 200 ; Renaissance Capital, 2002; Itera, 2002) 4. Meanwhile, Gazprom is aiming to recover the FSU gas markets that it relinquished to trader Itera in the 990s. But as the FSU economies have begun to stabilise, Gazprom wants to restore its cut of the business. Mezhregiongaz - Gazprom s marketing subsidiary - which until now has worked only in Russia, will compete with Itera to deliver natural gas to Ukraine, Belarus and the Baltic States. In 200, Itera earned USD.7 bn from supplying gas to Ukraine, plus a further USD 50 mn from Belarus and USD 00 mn from the Baltic States. Separately, Itera delivers around 38.5 bcm of gas to FSU states under commercial terms of as high as USD 70 per 000 cubic meter. And Gazprom believes it can undercut the private trader. The firm is also keen to usurp Itera s role as the main importer of Turkmen gas. Thus, Itera appears to have lost its status as the operator of Turkmen gas sales to Ukraine and may be in danger of losing its entrenched position in the Ukrainian market. An inter-governmental agreement between Russia and Ukraine suggests that Gazprom could take over responsibility for gas sales to Ukraine. This may be part of a broader move away from any official support of Itera as a gas trader in the CIS 5. Gazprom officials hint that Itera will not be allowed to continue with these lucrative contracts in future. Gazprom wants to regain a key role in FSU gas transactions because we need more imported gas from central Asia, a senior Gazprom official announced 6. Nevertheless, the Western FSU states - especially Ukraine and Belarus - are important for Gazprom as transit countries to Central and Western Europe and the Central Asian FSU states are producers of natural gas with huge reserves and in so far potential competitors to Gazprom..3.2. Problems with Transit Countries Until now, Russian natural gas - for Western Europe as well as for Southeast Europe and Turkey - is being exported via Belarus and Ukraine 7. After the collapse of the Soviet Union, conditions for the transport of natural gas from Russia to Western Europe changed radically. The newly independent states, Belarus and Ukraine, introduced transit fees, which made Russian gas exports more expensive. In addition, the transit countries have often forced Gazprom to accept a compromise on their debts for natural gas deliveries. Especially 4 Itera company information, http://www.iteragroup.com. 5 United Financial Group, Russia Morning Comment, 5 November, 200. 6 Petroleum Argus, FSU Energy, 4 June, 2002. 7 At present Gazprom s delivers more than 80% of its gas exports to Europe via Ukraine s pipeline network (Petroleum Argus, FSU Energy, 4 June, 2002). 50

Andreas Heinrich Ukraine has tried to use her near monopoly position on Russian gas transit to Western Europe to offset its weak position as a customer for Russian gas and as a debtor to Gazprom. Because of long-lasting quarrels with Ukraine about transit fees, and because of accusations that gas was being siphoned off during transit, Gazprom developed plans for alternative transit routes to break the transit monopoly of Ukraine and to reduce transit across FSU countries as much as possible. Table. Gazprom s Natural Gas Exports to FSU Countries (bcm) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Total exports 284.7 N/A 205.8 179.4 184.0 191.3 199.5 190.1 173.0 174.0 172.4 Ukraine 00.8 78. 78. 54.7 57.0 52.3 5.0 49.3 30.5 29.6 27.2 Belarus 40.0 7.3 7.3 6.4 4.7 2.9 3.7 5.2 4.7 2.2 0.8 Moldova N/A 3.4 3.4 3. 3.0 3.0 3.2 3.3 2.9 2..8 Lithuania 5.8 3.3 3.3.8 2. 2.5 2.6 2.2 2.2.8 2.0 Latvia 3.3.6.6.0..2...3.0.0 Estonia.5 0.9 0.9 0.4 0.6 0.7 0.8 0.8 0.8 0.5 0.6 Kazakhstan 5.4 2.0 2.0. 0.4 0. 0.4 0.8 Georgia 4.9 0.3 0.2 0.9 Azerbaijan.7 Turkmenistan.3 Subtotal FSU 174.7 106.6 106.6 78.5 79.2 72.7 73.0 73.3 52.4 47.2 43.4 Percentage of 61.4 N/A 51.8 43.8 43.0 37.7 36.6 38.6 30.3 27.1 25.2 total Sources: Petroleum Economist ( 996) May, p. 82; Petroleum Economist ( 997), special issue Gas in the FSU and Eastern Europe, September, p. 72; E+Russia AG ( 997) RAO Gazprom, E+Russia, Gescher, p. 7; FARCO Securities ( 998), RAO Gazprom, Moscow, http://www.securities.com; Gazprom 998, p. 25; Gazprom 999, p. 29; Gazprom 2000, http://www.securities.com, Business Communications Agency (2000) 3 December; Renaissance Capital 2002, p. 92; own calculations. One of the alternative transit routes is the Yamal pipeline from the Western Siberian gas fields on the Yamal peninsula bypassing Ukraine and instead going directly through Belarus and Poland and further on to Germany over a distance of 4 05 km. The pipeline is being constructed step by step from west to east, partly via existing pipeline capacities. Capital spending on the Yamal project will total approximately USD 40 bn 8. Gazprom s payment problems, causing delays in the delivery of pipes and the withdrawal of an international credit after the financial crisis in 998, have delayed the construction works 9. In September 999, the first part of the pipeline has been completed from Germany through 8 Wingas, http://www.wingas.de/wingas.nst 9 Petroleum Economist ( 998) No. 0. 5

Internationalisation of Russia s Gazprom Poland to the Belarus-Russian border. In 2000, almost 4 bcm of gas were pumped through this new section by re-routing gas from existing pipelines. The Yamal pipeline currently carries around 20 bcm of gas annually. However, construction of the 2932 km Russian section has yet to begin 0. However, the construction of these pipelines can at best moderate the problems with Ukraine, because alternative export capacities will not be enough to stop transit through Ukraine altogether and Belarus might cause the same problems for gas transits as Ukraine does. A real solution of the transport problem could perhaps be reached through a pipeline via Finland, Sweden and Denmark to Western Europe. To secure control over transit pipelines will be a major task for Gazprom in the next few years. That is why Gazprom has been trying for years to swap transit countries debts for stakes in their gas transit infrastructure. However, this strategy has been successful only in Moldavia. Ukraine and Belarus have so far ignored all related demands (Heinrich, 999a)..3.3. Weakening the Central Asian Competitors Gazprom is trying to weaken the position of Central Asian gas producers, which are trying to reach the world market. Since all producers in the former Soviet republics of Central Asia need the Russian pipeline system for gas exports beyond the region, Gazprom has so far been successful. But Central Asian producers are now planning alternative export pipelines avoiding Russian territory. Most of these ambitious plans are unlikely to be realised. Accordingly, Central Asian gas producers will continue to depend on Gazprom, at least for some years to come. In order to solve the transit problem and eliminate Central Asian competitors, Gazprom aims at the establishment of a unified energy sector within the FSU. The Russian government promotes this project. The main instrument for its realisation is the acquisition of controlling stakes in energy companies in the relevant states. Gazprom has succeeded in getting property rights to gas companies and in enforcing the establishment of joint ventures. Through pressure related to its monopoly on transit pipelines, Gazprom was able to become a member of the consortium, which exploits the Karakhaganak natural gas field in Kazakhstan. In the same way, Gazprom entered the gas business in Turkmenistan. In 995, Gazprom enforced the establishment of the joint venture Turkmenrosgaz, with a monopoly on Turkmen natural gas exports. After Turkmenistan suspended its deliveries to Ukraine due to the non-payment crisis 0 Reuters, 23 September, 999; Trafalgar (200 ); RFE/RL Business Watch, 6 April, 2002. Gazprom plans to deliver natural gas to Sweden through a pipeline from Finland across the Baltic Sea (NewsBase, FSU Oil and Gas Monitor, 29 June, 999; Trafalgar, 200 ). 52

Andreas Heinrich in March 997 Gazprom put an end to the joint venture and revoked the pipeline access for Turkmen gas in autumn 997. At the end of the 990s, however, Gazprom has to certain degree become dependent on Central Asian gas producers, because the Russian company has not been able to fulfil all its delivery obligation with domestic production. In 999, Gazprom signed a deal with the Dutch gas trader Gasunie for the delivery of 80 bcm over a 20-year period starting in October 200. To fulfil this contract, Russia signed an import deal with Turkmenistan for a one-year import of 20 bcm. In the medium term Gazprom also needs Turkmen gas for the Blue Stream pipeline to Turkey 2. Because of the Russian gas deficit imports from Turkmenistan are to be continued. Experts have estimated the Russian gas deficit at 0 bcm per year, a figure that may grow to 30 bcm by 2005 due to falling extraction from Gazprom s old deposits and growing gas consumption 3. This might be the reason why the Russian President Putin in early 2002 suggested creating a Eurasian gas alliance with the Central Asian gas producers. Retaining control over the Central Asian gas reserves was on Russia s agenda during most of the 990s. Additionally, this suggestion might also be an expression of the growing concerns about Western influence in the region in the wake of the war in Afghanistan 4. 1.4. Western and Central Europe.4.. Expansion of Export Capacities Gazprom has developed plans to expand natural gas exports in all possible directions. Especially in Western and Central Europe, Gazprom is trying to diversify the structure of its consumer base and to increase participation in deliveries to end-users. Moreover, the company has initiated an attempt to gain direct access to large industrial and gas-fired power generation markets in Western and Central Europe. Gazprom hopes to profit from the European Union s gas market liberalisation attempts by getting access to the downstream business in Western Europe. At the same time, the expansion of export capacities requires an increase in gas production, and with that the development of new gas deposits, and in addition provision of the necessary investment capital. 2 Gasunie, http://www.gasunie.nl/eng/ p_ga_fi_99.htm; NewsBase, FSU Oil & Gas Monitor, 2 October, 200. 3 NewsBase, FSU Oil & Gas Monitor, 6 November, 200 ; see also Götz (2002). 4 NewsBase, FSU Oil & Gas Monitor, 29 January, 2002; RFE/RL Business Watch, 29 January, 2002. 53

Internationalisation of Russia s Gazprom The expansion of export capacities, however, meets with both external and internal problems. Production costs will rise, problems with transit countries will continue, and prognoses of future demand on the West European gas market have been over-optimistic (Heinrich, 999b; Götz, 2002). Table 2. Gazprom s Natural Gas Exports to Central & Western Europe (bcm) 1990 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total 284.7 205.8 179.4 184.0 191.3 199.5 190.1 173.0 174.0 172.4 166.0 exports Germany 26.6 22.9 25.7 29.6 32. 32.9 32.5 32.5 34.9 34. 32.6 Italy 3.6 4. 3.8 3.8 4.3 4.0 4.2 7.3 9.8 2.8 20.2 France 0.6 2..6 2.2 2.9 2.4 0.9 0.9 3.4 2.9.2 Austria 5. 5. 5.3 5. 6. 6.0 5.6 5.7 5.4 5. 4.9 Turkey 3.3 4.5 5. 4.7 5.7 5.6 6.7 6.7 8.9 0.2. Finland 2.7 3.0 3. 3.4 3.6 3.7 3.6 4.2 4.2 4.3 4.5 Switzerland 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.3 Greece 0.0 0.2 0.9.5.6.5 Western 62.2 62.1 65.0 69.2 75.1 75.0 74.1 78.6 88.5 90.4 86.3 Europe Percentage 21.8 30.2 36.2 37.6 39.3 37.6 39.0 45.4 50.9 52.4 52.0 of total Czech 4.2 2.8 3.2 3.8 8.4 9.4 8.4 8.6 7.8 7.5 7.5 Republic* Slovakia 6.5 7.0 7. 7. 7.5 7.9 7.5 Poland 8.4 6.7 5.8 6.2 7.2 7. 6.8 6.9 6. 6.8 7.5 Hungary 6.5 4.8 5.7 5.2 6.3 7.7 6.5 7.3 7.4 7.8 8.0 Bulgaria 6.9 5.2 4.8 4.7 5.8 6.0 5.0 3.6 3.2 3.2 3.3 Romania 7.3 4.6 4.6 4.5 6. 7. 5. 4.7 3.2 3.2 2.9 Former 4.5 3.0.8.2 Yugoslavia ** Slovenia 0.5 0.5 0.5 0.5 0.6 0.7 0.6 Croatia 0.3.0..2.2.2.2 Bosnia.2 0.4 0. 0.2 0.2 0.3 0.2 Serbia/.2 2. 2..9..2.2 Montenegro Macedonia 0.0 0.02 0.04 0.07 0.09 Central 47.8 37.1 35.9 35.6 43.5 48.3 42.7 42.0 38.3 39.9 40.0 Europe Percentage 16.8 18.0 20.0 19.3 22.7 24.2 22.5 24.3 22.0 23.1 24.1 of total * until 995 together with Slovakia (former Czechoslovakia) 54

Andreas Heinrich ** until 994 Yugoslavia included Serbia, Croatia, Bosnia, Slovenia, Montenegro and Macedonia. Sources: Petroleum Economist ( 996) May, p. 82; Petroleum Economist ( 997), special issue Gas in the FSU and Eastern Europe, September, p. 72; E+Russia AG ( 997) RAO Gazprom, E+Russia, Gescher, p. 7; FARCO Securities ( 998), RAO Gazprom, Moscow, http:///www.securities.com; Gazprom 998, p. 25; Gazprom 999, p. 29; Gazprom 2000, http://www.securities.com; Business Communications Agency (2000) 3 December; Myers- Jaffe/ Manning 200, p. 37; Interfax (2002) 29 January; NewsBase, FSU Oil & Gas Monitor (2002) No. 2, 27 March; own calculations. Difficult climatic conditions, outdated technology, and the extremely long transport routes to the customers will lead to increased costs in the next few years. For these reasons, Gazprom is losing its price advantages over competitors on the European natural gas market 5. This problem is reflected in the company s difficulties in attracting the financial means necessary for investment in modern technology. Estimates put the infrastructure requirements for Gazprom s existing operations at USD 3.5-6.0 bn (Moors, 999). After the Russian financial crisis in August 998, Gazprom has found it even harder to get foreign loans. In 2000, the loans needed for major projects could only be attracted in co-operation with foreign partners. Most prognoses for Western Europe s natural gas demand are overoptimistic. A tendency towards a growing discrepancy between general economic development and energy demand in Western Europe can be observed: economic growth no longer leads to an equivalent rise in energy consumption. Also, in the main national markets the residential and commercial sectors are already integrated into a countrywide gas supply system. The quantitative increase in natural gas consumption will only be slow, so that there is not much room for dynamic growth. Additionally, new suppliers will make the European gas market more competitive (Heinrich, 999b; Götz, 2002)..4.2. The Financial Situation of Gazprom A main problem for Gazprom s financial situation is the non-payment crisis on the Russian domestic market. The proportion of cash payments has been below 25% for a couple of years. The overall debt of Russian consumers for gas deliveries was equal to more than one year s total domestic supply 6. The share of cash payments in 2000 rose to 70% from 39% in 999 (Renaissance Capital, 2002). Gazprom has re-organised payment mechanisms in a way, which it believes will help it improve collection rates and reduce the level of receivables. The three main measures are: ) the 999 agreement with the electricity monopoly RAO UES (one of the largest debtors); 2) strengthening the role of 5 WPS, CIS Oil and Gas Report 6 July, 200 and Götz (2002). 6 Analytica Newsletter, Profili kompanii Gazprom, 9 February, 2000. 55

Internationalisation of Russia s Gazprom Mezhregiongaz (which enforces payments on the regional level and reducing non-monetary forms of payment from around 80% to 0% of its turnover 7 ); and 3) reducing or suspending deliveries to recalcitrant consumers within Russia and the FSU (O Sullivan & Avdeev, 2000). Because the Russian capital market is underdeveloped, Gazprom has used the international financial markets to get loans and to issue American Depository Receipts (ADRs) for financing its expansion plans. In 999, Gazprom paid about USD.75 bn on a total international bank syndication debt believed to amount to about USD 25 bn (Moors, 999). At present, it is assumed that Gazprom has to service loans which totally amounted to USD 3 bn (Götz, 2002). In its behaviour on international financial markets, Gazprom differs less and less from the main Western companies. It works with international auditing companies and investment banks to attract loans, services its debts, issues ADRs, and publishes company reports according to international accounting standards. After the August 998 crisis and the fall in international gas prices, it became harder for Gazprom to attract foreign loans. The company lost its privileged position as the preferred Russian company. In 999, Gazprom received no large foreign loan but only small ones for specific upgrading projects. As a result, the company had to reduce its investment program by two thirds. In order to finance its main long-term projects, Gazprom has had to draw on the assistance of its Western strategic partners. These long-term projects include development of the domestic gas grid, the Yamal-Europe pipeline, the building of storage facilities, the acquisition of new gas deposits, and the Blue Stream pipeline across the Black Sea to Turkey. The attempts of Gazprom and its strategic partner Eni from Italy to get loans to finance the Blue Stream project dragged on for nearly two years. In 2000, the relevant deals were finally made, providing nearly USD 2 bn in loans from Italian, Japanese and German creditors 8. In March 200, Gazprom received an additional Euro 250 mn five-year loan from European banks to finance the construction of the onshore section of its Blue Stream gas pipeline. Gazprom explained that this was the first loan it received from European banks since 998 that was not insured by export credit agencies 9. 7 Petroleum Argus, FSU Energy, 4 June, 2002. 8 O Sullivan & Avdeev (2000); NefteCompass, January, 200. 9 NewsBase, FSU Oil & Gas Monitor, 0 January, 200 ; Nefte Compass, March, 200. The prospect of the liberalisation of the European gas market might be another factor for Gazprom s destabilised financial situation. This liberalisation may lead to the development of a system of spot contracts for the purchase of gas lots. This would infringe on long-term agreements without which Gazprom cannot attract foreign loans to finance large-scale projects (WPS, CIS Oil and Gas Report, 6 July, 200 ). 56

Andreas Heinrich Since the beginning of 2002, Gazprom received several small foreign loans, which together amounted to USD 580 mn 20. Additionally, Gazprom placed a USD 500 mn Eurobond in April 2002. Credit Suisse First Boston and Schroder Salomon Smith Barney acted as lead managers for the issue. First plans to issue USD bn worth of Eurobonds were worked out by Gazprom during 996, 997 and 998. Table 3. Gazprom s International Loans, 993-998 Year Amount Partner Project 993 DM.5 bn Commerzbank (Germany) Pipeline construction (Germany) 994 DM 936 mn N/A Construction of an ethylene plant in Russia USD.6 5 Mediocredito Centrale (Italy) Import of equipment and technology bn 995 DM.3 bn Commerzbank (Germany) Pipeline construction (Germany) 996 DM bn Kali-Bank GmbH (Wintershall Pipeline construction (Yamal) subsidiary) USD 429.27 mn Morgan Stanley, Dresdner Kleinworth Benson Emission of ADR at the New York Stock Exchange 997 USD 2.5 bn Dresdner Bank Luxemburg and 8 other banks DM.675 Dresdner Bank and Deutsche Import of equipment and technology bn Bank (Germany) USD 265 EBRD mn USD.2 bn Dresdner Kleinworth Benson Loan for tax payments in Russia and Credit Lyonnais USD 60 mn Citibank International and Loan for the Gazprom Bank Commerzbank USD 3 bn Dresdner Bank Luxembourg and Credit Lyonnais Pipeline construction (Yamal) and re-financing of other loans 998 USD 33. Citibank International Re-financing of other loans mn USD 230 Deutsche Morgan Greenfell and Loan for the Gazprom Bank mn Easkilda Debt Capital Markets USD 200 Bayerische Landesbank, Chase Export financing mn Manhattan and others. Source: Heinrich ( 999a, 4-5). 20 NewsBase, FSU Oil & Gas Monitor, 6 October, 200 ; NewsBase, Russia Weekly, 9 November, 200 ; NewsBase, Russia Weekly, 8 March, 2002. 57

Internationalisation of Russia s Gazprom Yet, however, the plan had been abandoned in the wake of the Russian financial crisis. In 200, Gazprom again had planned to issue its first Eurobonds. However, the plan was postponed for several times 2. Due to the good success of the Eurobond issue the company approved in May 2002 the issue of another USD 400 mn Eurobond until the end of 2002 22. To sum up, it can be noticed that Gazprom still highly depends on international capital markets. Certainly, the Russian government has concern about excessive foreign debts of Gazprom, but due to the underdeveloped Russian capital market there is no real alternative to foreign loans for the company. The Russian Energy Minister announced that the government plans to take measures to switch Gazprom to domestic borrowings. However, Gazprom cannot receive loans from Russian banks on preferred terms 23. Thus, the company s dependence on international capital markets and foreign loans will continue. Accordingly, in June 2002, Gazprom decided to borrow USD 250 mn from the French Societe Generale on the security of an export contract 24..4.3. Strategic Partnerships Gazprom is engaging in strategic partnerships with leading Western natural gas companies in order to gain access to new markets and new sources of finance. It is a means of bringing in foreign companies that have their own access to loans at more affordable rates (Moors, 999). In long-term co-operation the Russian company has proven that it is a reliable partner. In Germany, Gazprom is cooperating with Ruhrgas and BASF/Wintershall, in Italy with Eni. The company is also co-operating with the international Royal Dutch/Shell Group. At the end of 997, Shell and Gazprom signed an agreement on a strategic partnership including co-operation in the exploitation of oil, gas and liquid gas. The partners are also planning projects in the energy transportation sector. Through this alliance, Gazprom hopes to open up markets in Asia, the Far East and South East Asia 25. Despite this alliance, both companies were competitors on the Turkish natural gas market. While Gazprom was planning a pipeline across the Black Sea ( Blue Stream ), Shell was until June 2000 involved in a project which would have delivered Turkmen gas to Turkey via a pipeline across the Caspian Sea 26. In June 2002, Italy s Eni announced that it had completed laying the second line of the dual natural gas pipeline. Inauguration of the pipeline is due to take place in October of 2002 (Coe, 2002). 2 NewsBase, Russia Weekly, 8 March, 2002; Energy & Politics, 20 May, 998; NewsBase, FSU Oil & Gas Monitor, 2 June, 200. 22 BBC Monitoring, FSU & Central Asia, 2 May, 2002. 23 WPS, Russian Finance Report, 8 February, 2002; Moscow Times, 25 June, 2002. 24 Moscow Times 25 June, 2002; IntelliNews, Russia Today 25 June, 2002. 25 Koshkareva & Narzikulov ( 997); Shell, ( 997) http://www.shell.com/library/press/. 26 Kommersant, 29 June, 2000; Shell ( 999) http://www.shell.com/library/press/. 58

Andreas Heinrich The co-operation in exploitation started in the super-giant Zapolyarnoye field in the Ob-Taz Gulf in the far north of Western Siberia. Gazprom hopes to extract annually at least 05 bcm of gas from the Zapolyarnoye deposit until 2003. A feasibility study for the field was prepared in summer 2000. Zapolyarnoye was made operative in October 200 and has become the first deposit to be discovered by Gazprom since 989 27. Meanwhile, Shell s role in developing the Zapolyarnoye field, which mainly contain gas condensate, remains unclear. Shell says it is still interested in the project but that work will not be able to start in earnest until Russia delivers workable production-sharing agreement legislation. Gazprom sources say there is disagreement on the best way to develop the field 28. However, Shell invited Gazprom to join the Sakhalin-II project. The Sakhalin-II project is operated by Shell, which might be stepping up co-operation with Gazprom for need of political support from a local partner 29. The co-operation with Ruhrgas - which has a market share of more than 60% in Germany - helps Gazprom to increase its access to the West European gas market and to prepare for the partial liberalisation of the EU gas market. The partnership with Ruhrgas started in 970, when the first supply contract between the Soviet Union and Ruhrgas was signed. In the period 973-97 Soviet, respectively Russian, natural gas sales to Ruhrgas amounted to a total of 355 bcm, worth around USD 32.5 bn (at current prices). Until 2020 an additional 370 bcm, worth USD 35.5 bn, are to be delivered according to present contracts. By the end of 2000, Ruhrgas held a stake of 5% in Gazprom and a seat on the company board 30. A consortium of Gazprom, Ruhrgas and Gaz de France has won the privatisation tender for sale of a 49% stake of Slovakia s national gas monopoly SPP. Participation in the management of SPP is strategically important for Gazprom because the company exports around 70% of its gas to Western Europe via the Slovak pipeline system 3. Additionally, Gazprom expressed interest in building a new section of the Slovak part of the main gas trunk line from Russia to Western Europe 32. In 989, Gazprom began to look for new business opportunities in the West European downstream sector. However, Ruhrgas seemed to be unwilling to grant its Russian partner access to that profitable part of the gas market. As a result, Gazprom signed a co-operation agreement with Wintershall - a subsidiary of BASF and one of the main competitors of Ruhrgas in the German natural gas 27 Interfax, 6 January, 200 ; NewsBase, FSU Oil & Gas Monitor, 6 November, 200. 28 Petroleum Argus, FSU Energy, 4 June, 2002. 29 Vedomosti, 7 April, 2002. 30 Nefte Compass, 4 December, 2000; Liuhto (200 ). 3 WPS, CIS Oil and Gas Report, 8 March, 2002. 32 NewsBase, FSU Oil & Gas Monitor, 23 October, 200. 59

Internationalisation of Russia s Gazprom market. The agreement includes the joint marketing of Russian natural gas, as well as the joint planning and construction of gas pipelines and storage facilities in Germany and in the neighbouring countries. The resulting tensions with Ruhrgas disappeared only very slowly. The co-operation with Wintershall offers Gazprom lasting access to the West European gas supply system in the downstream sector (Heinrich, 999a/ 999b). In March 999, Gazprom formed a strategic alliance with BASF for exploiting oil and gas in Russia (Osetinskaia, 999). Wintershall is carving out a role in the upstream development of Gazprom s massive Urengoi gas producing zone in Western Siberia for several years. By the middle of 2002, a joint venture is planned to be created for the exploitation of the Achimovskoye formation in Novy Urengoi. Wintershall may also take part in developing the deeper layers of Gazprom s Yamburg field in the Ural Mountains 33. Gazprom s co-operation with Eni, which can be traced back to the end of the 960s, follows similar patterns. At the beginning of 998, a strategic alliance was formed for the development, exploitation, transport, and sale of oil, gas, and gas condensate in different countries. Most importantly, Eni is involved in the Blue Stream project. The agreement also includes the development of natural gas fields in the Russian Astrakhan region. In addition, Gazprom is trying to use its partnership with Eni in order to enter the de-monopolised Italian gas market and to strengthen its position on the Southern European gas market (Heinrich, 999a). In summer 200, Eni announced that it is interested in acquiring a stake in Gazprom 34. In its co-operation with West European gas companies Gazprom has acted as a reliable partner. As a result co-operation has been intensified in the last year, concentrating not only on Russian gas exports but on a multitude of strategic issues, including among others upgrading of technology, personnel training, and environment protection. 2. Conclusion Looking at the development of export activities as presented in the case study above, it becomes obvious, that the stage model is too deterministic and that the choice of entry mode can be independent of a firm s previous experience in export markets. This study likewise shows that firms do not necessarily follow any particular and consistent pattern in their internationalisation process. Firms may choose different entry modes and internationalisation patterns in different countries. There seems also to be a tendency of differences between different industries. 33 Petroleum Argus, FSU Energy, 4 June, 2002; Snieckus (200 ); NewsBase, FSU Oil & Gas Monitor, 4 February, 2002. 34 NewsBase, FSU Oil & Gas Monitor, 4 August, 200. 60

Andreas Heinrich Table 4. Some Major Stakes of Gazprom in European Gas Joint Ventures Country Joint Venture Stake Activities Armenia ArmRosGazprom 45% Gas trading and transport Austria GHW 50% Gas trading company Bulgaria Topenergy (Topenergo) 00% Gas trading and transport Overgas 23.2% Gas trading Estonia Eesti Gaas 30.6% Gas trading and transport Finland Gasum Oy 25% Gas transportation and marketing North Transgas Oy 50% Construction of a pipeline beneath the Baltic Sea France FRAgaz 50% Gas trading Germany Ditgaz 49% Gas trading Verbundnetz Gas 5.3% Gas transportation and marketing (VNG) Wintershall Erdgas Handelshaus (WIEH) 50% Gas trading company. Single trader of all the gas exported by Gazeksport until 20 2. Zarubezhgas 00% Gas trading Erdgashandel Greece Prometheus Gaz 50% Marketing and construction Hungary Panrusgas 40% Gas trading and transport Italy Volta 49% Gas trading and transport Promgaz 50% Gas trading and marketing Latvia Latvijas Gaze 25% Gas trading and transport Lithuania Stella-Vitae 30% Gas trading Moldova Gazsnabtransit 50% Gas trading and transport Netherlands Peter-Gaz 5 % Gas trading Poland Gas Trading 35% Gas trading Europol Gaz (Evropol 48% Gas transport Gaz) Romania WIROM 25% Gas trading. The stake of Gazprom is hold by WIEH Slovak Slovrusgaz 50% Gas trading and transport Republic Slovenia Tagdem 7.6% Gas trading SPP 6.3% Gas trading and transport Turkey Turusgaz 45% Gas trading UK/ Belgium Interconnector 0% Pipeline which connected Bacton (UK) with Zeebrugge (Belgium) Yugoslavia YugoRosGaz 50% Gas trading and transport Progress Gas Trading 50% Gas trading Sources: UNCTAD 200, 6; NAUFOR, Company Profiles in Figures: Gazprom (2002) 5 January; company data, http://www.gazprom.ru/. 6

Internationalisation of Russia s Gazprom In the case of the Soviet/Russian natural gas industry the stage model has to be modified due to peculiarities of the gas business. Natural gas exports demand the construction of an expensive pipeline infrastructure, stretching geographically from the exporting country to the importing country. Accordingly Soviet natural gas exports to Western Europe could only start after the pipeline network in Eastern Europe had been extended to reach Czechoslovakia. Construction of the necessary export infrastructure obviously demands long-term investment and with that long-term supply contracts to justify investments. That is why stage of the stage model (no regular export activities) is not applicable to the Soviet/Russian natural gas industry. Stages 3 and 4 (the establishment of overseas sales subsidiaries and the foundation of overseas production units 35 ) were only entered in the post-soviet period, when Soviet restrictions on investments abroad and EU restrictions on the gas market were lifted. The internationalisation of the Soviet gas industry and Gazprom respectively, was not subject to constant periods of entering. Instead export activities were dependent on the extension of the European gas grid. As soon as the pipeline grid was in place, deliveries started. This in fact supports the thesis, that general knowledge of internationalisation is rather more important than country-specific knowledge - at least in the Western European context (Clark et al., 997) 36. In the beginning the process of internationalisation was limited to the export of natural gas. Payment for gas deliveries took the form of transfer roubles or - more important in this analysis - in goods (steel pipes) and services (multinational construction projects), leading to a technology transfer already in Soviet times. Only in the 990s did the Russian gas industry enter a new stage of international activities. Gazprom established overseas sale subsidiaries in nearly all the Western and Central European countries to which natural gas was exported. The main reasons for this are market seeking (participation in the EU downstream market) as well as strategic asset or capability seeking (mainly in Central Europe and FSU in order to maintain influence and secure control over transit routes). To avoid opportunistic behaviour by its partners Gazprom is endeavouring to maintain control through a majority ownership rather than to act as a profit-seeking investor only (Liuhto, 200 ). The commitments and the long time-perspective of natural gas contracts pave the way for stable relationships between seller and buyer. Such long-term relationships promote strategic alliances, marked by mutual dependence since the exit option implies high infra-structural sunk costs. The alliance with the 35 There were only a few joint production ventures of Gazprom, like Karakhaganak in Kazakhstan or South Pars in Iran. 36 As a whole, the internationlization strategies of the Soviet corporations did not significantly deviate between the Western countries concerned (Liuhto, 200, 0). 62

Andreas Heinrich German Ruhrgas and the resulting organisational learning has considerably increased the market knowledge of Gazprom s management. Gazprom has employed this market knowledge to increase penetration of the German natural gas market, thus using Ruhrgas as a bridgehead and for some time causing a conflict with Ruhrgas over collaboration with its competitor Wintershall. However, the mutual dependence and the long-term experience helped to solve this conflict and led to intensified co-operation. The case study thus confirms the general assumption about the role of market knowledge 37 and mutual dependence 38. In Soviet times energy exports had a political component. First, energy exports could be used to foster political integration. A widely-held goal for Soviet policy towards Western Europe is to tie these countries closer to the Soviet Union. [ ] Another fairly obvious Soviet goal is to make use of any opportunity to drive a wedge into the relationship between Western Europe and the United States (Estrada et al., 988, 79). Second, dependence on Soviet energy deliveries could also be used to exert pressure. The Soviet Union does have a reputation [...] for using energy exports to exert political pressure. In the late 950s and early 960s the country used cuts in oil deliveries as a political weapon against countries like Yugoslavia and Israel. However, this was in a period when Soviet oil exports were of only minor importance to the economy, indeed total Soviet foreign trade was much smaller than today (Estrada et al., 988, 80). Increasing internationalisation with the expansion of natural gas exports in the 970s, made the Soviet Union economically more dependent on these exports as a main source of hard currency income and technology transfers. The Soviet motivation for exporting gas to Western Europe could be seen as overwhelmingly economic. Energy exports to the world market steadily increased in volume during the 970s and became increasingly important as a percentage of total Soviet hard currency earnings (Stern, 986, 49). These commodities accounted for just over 25% (gas = 0.7%) of the country s hard currency earnings at the beginning of the 970s, but for nearly 60% (gas =. %) by the end of the decade and 80% (gas = 6.7%) in 982. As a result political motives lost importance and stable economic co-operation became the main aim. The change in motives also led to a change in behaviour. It seems fair to observe that Soviet exporters have worked hard [...] to shed this 37 It is rather the record of long-term trading which matters in making trading partners cooperative with each other. Since committed relationships incorporate mutual long-term investments, they also provide access to specific information concerning the related party s business relationship (Blankenburg-Holm & Erikson, 2000, 97). 38 Ventures and partnerships are more likely to succeed when partners possess complementary missions and resource capabilities (Blankenburg-Holm & Erikson, 2000, 96). 63

Internationalisation of Russia s Gazprom reputation and to avoid any action that could give reason for new suspicion (Estrada et al., 988, 80). Over the years the Soviet negotiators became familiar with, and experts in, the conduct of natural gas trade negotiations. The Soviet side adhered to agreements and proves to be very satisfactory trading partner (Stern, 986/ 989). When the Soviet Ministry for the Gas Industry was transformed into the company Gazprom not much did change in this respect. Gazprom inherited the encompassing interests developed by the Soviet gas industry a long time ago. Gazprom like the Soviet Ministry of the Natural Gas Industry had to establish itself as a reliable partner of the West in order to ensure profitable gas exports. As a result Gazprom pursues a reliable and fair company policy based on the rules of international business behaviour. This is the only way for the company to get international loans, to issue ADRs, and to engage in strategic partnerships with leading Western natural gas companies. As a result, the Russian gas giant does not differ significantly from other big national or multinational oil and gas companies. However, within the FSU, solvency, payment behaviour and loyalty to the terms of a contract differ from Western standards. Under these unfavourable conditions the Russian gas monopoly sees control over the energy sector of the former Soviet Union as an opportunity to maximise profits. The company tries to externalise costs and to weaken its competitors from Central Asia. Gazprom s strategy, though, has so far had only limited success. Neither the restrictions on the transit of Central Asian gas through Russia nor the gas debts of Western FSU countries have helped Gazprom to gain control over the natural gas sector of the former Soviet Union. Instead, the Central Asian gas producers have been looking for alternative export routes. Western countries - especially the USA - are interested in supporting these attempts as a way to roll back Russian influence in the region. Gazprom has also failed to bend the transit countries to its will. On the contrary, the transit countries, and most notably Ukraine, have often forced Gazprom to accept a compromise on their debts for natural gas deliveries because of their importance for gas exports. In summary, it can be said that Gazprom pursues two completely different strategies at its different levels of action at least as far as the gas export business is concerned. At the international level, the company aims at further integration into a globalising world economy. At the FSU level, however, it tries to preserve regulated and hierarchical markets as a pre-condition for successful rent-seeking behaviour based on the externalisation of costs. This means that internationalisation has influenced that part of Gazprom s business, which is related to operations with foreign (i.e. non-fsu) partners and customers. In the FSU, however, internationalisation does not really have an impact on the company s behaviour. That means Gazprom has a janus-faced enterprise behaviour, which depends on the markets on which it operates. 64